The internet has led to a massive increase in the amount of information available.
Often, this is a good thing. For example, shopping around to find the cheapest price for something has become far easier.
But it can have its downsides. A report last week from the consumer magazine Which highlighted one such disadvantage. An investigation claimed that the review system on parts of Amazon was being undermined by fake five-star reviews.
The magazine analysed the listings of hundreds of popular tech products in 14 online categories, such as headphones and smartwatches.
Researchers sorted the headphone reviews, for example, by the average scores of the brands. The first page of results – those with the highest scores – consisted almost entirely of little-known brands, with nearly 90 per cent of the reviews from unverified buyers.
In other words, there was no evidence that the reviewer had ever bought the item in the first place.
Companies like Amazon are well aware of these potential problems. They take steps to try to guard against them. A flurry of very good posts for a less well-known brand is one of the classic footprints which enable fake reviews to be identified.
But Which suggested that the volume and variety of fake reviews was so large that the defences are currently being overwhelmed.
A similar problem arose almost from the very start of email, when spam first appeared. Ever since then, a complicated evolutionary game has been played between the spammers and the spam filters.
It is a game because spam wins if it gets through, and the filters win if it does not. It is evolutionary because both sides are constantly adjusting their strategies. The filters seem gradually to be getting the better of it, though I am currently being plagued by emails from China offering to sell me plastic moulds.
The fake review – and more generally the fake news – problem has not been an issue for quite as long, but concern over it is growing.
The instinct of many people is to reach for the law, and in particular to regulate. Set up a body, staff it with bureaucrats who of course have the public interest at heart, and the problem will be solved, goes the logic. The European Commission is a strong proponent of this approach.
But there are already some good illustrations of the private sector reducing what economists describe as “reputation systems failures”.
For example, a 2017 paper by Andrey Fradkin and colleagues at the MIT School of Management analysed experiments by Airbnb.
A particularly successful one appears to be that of the simultaneous review: both the buyer and seller post their reviews, and only then are they allowed to see what was written about them.
Not all consumers give feedback. Many who have a bad experience do not bother to rate the seller or product – they just stop buying from the platform. Platform providers therefore have a strong incentive to verify posts and encourage real reviews, perhaps using monetary payments to reduce selection bias.
Just as we didn’t need to regulate against spam, given time, markets will find solutions to what is currently a pressing problem.
As published in City AM Wednesday 24th April 2019
Image: Online shopping by Maxpixel is licensed under CC0 1.0
The International Monetary Fund (IMF) is up to its usual tricks. Last week, it predicted a two-year recession in the UK in the event of a no-deal Brexit.
Even in the main forecast, involving a mild Brexit, GDP was projected to grow by only 1.2 per cent this year and 1.4 per cent in 2020.
These are very gloomy numbers. If they were correct, it would be the weakest period of growth since the financial crisis itself in 2008 and 2009.
The IMF has form on this matter. Six years ago, in the spring of 2013, mainstream economists were full of doubt that the government’s policy of austerity would work. In January that year, the IMF projected only one per cent growth, which in April it slashed to just 0.6 per cent.
In fact, economic growth accelerated from 1.4 per cent in 2012 to 2.0 per cent in 2013 and 3.0 per cent in 2014. In line with the thinking of Project Fear, in the middle of June 2016 the IMF predicted an immediate recession if the UK voted to leave.
Exactly the opposite happened. The economy continued to grow, and unemployment to decline. To be fair, this time around there does seem to be evidence of a slow-down. The Office for National Statistics (ONS) suggests only modest growth at an annual rate of around one per cent in the last three months of last year.
A recent Deloitte’s survey of chief financial officers found only 13 per cent of them more optimistic about prospects than they were three months ago. Does the online world tell us anything different?
The ONS is making progress here. The agency is starting to use so-called big data to try to get faster and more accurate fixes on what is happening to economic activity. Online information such as value added tax returns and road traffic is being analysed.
Given that this is the first time it has ventured into this field, the ONS is understandably cautious about its initial estimates. It says, rather cryptically, that the indicators they are using are broadly in line with their long-term averages and paint a mixed picture.
Since 2016, with my UCL colleague Rickard Nyman, I have been monitoring on a daily basis how people in London are feeling.
The conventional measurement of wellbeing is based on responses to surveys. In contrast, the Feel Good Factor (FGF) extracts the sentiments which people reveal, knowingly or unknowingly, in their online posts, using advanced machine learning algorithms.
There were big drops immediately after Brexit and after Donald Trump’s election. But the FGF recovered in a matter of days.
Averaging the data over each quarter, optimism peaked at the start of 2017. By early 2018, a sharp drop took place, but sentiment was still around its 2016-19 average. During early 2019, the FGF is down again, but only slightly, and the past few weeks show no change compared to the same period last year.
Uncertainty over Brexit does seem to be having a negative impact on sentiment in the short term. But the overall trend offers some sunny perspective on the IMF’s dismal economic forecasts.
As published in City AM Wednesday 17th April 2019
Image: British Weather by Wikimedia is licensed under CC BY 2.0
As the Brexit process unfolds, the possibility of a Corbyn government has become much more tangible. Last month, John McDonnell, the shadow chancellor, wrote to the Treasury to say that in power he would require them to “widen the range of economic theories and approaches in which its officials and those in the rest of the government are trained”.
In principle, this would be a good thing. Machine learning algorithms, for example, have been shown beyond doubt to be more powerful than the traditional economists’ tool of econometrics for analysing data. Standard economic theory is not as good as cultural evolution theory at understanding how search engines, reputation systems, and social media affect the decisions we make and the news we read.
Somehow, however, one feels that this is not the retraining which McDonnell has in mind.
The fashionable idea among left-wing economists is something called “Modern Monetary Theory” (MMT). In the US, the rising Democrat star Alexandria Ocasio-Cortez appears to be keen on it, believing that it could finance her Green New Deal as well as an immense raft of social programmes and welfare benefits.
A key part of MMT asserts that governments who control their own currency can finance any level of spending simply by printing more money. Countries in the Eurozone, for example, cannot do this, because the European Central Bank controls how much money can be created – but the UK can.
A sharp increase in public largesse almost always creates an increase in the public sector deficit, which is the difference between spending and the income that the government gets from taxes.
The conventional way of financing the deficit is by issuing bonds. This both creates a stream of interest payments to the lenders, and at some point – depending on the date of maturity – have to be repaid.
MMT asserts that printing money instead removes these constraints. Money created by the government never needs to be repaid. For example, £10 notes carry the phrase “I promise to pay the bearer on demand the sum of 10 pounds”. If you take it to the cashier’s desk in the Bank of England, they will do just that – they will give you another £10 note instead.
Also, money carries no interest. In technical terms, we might think of money as a “zero coupon perpetual bond”, although I have never seen MMT theorists refer to it in this way. In one way, MMT is completely true. Countries like the US and the UK can finance government deficits by printing money rather than issuing bonds. Indeed, there are genuine arguments to be had about the appropriate mix of the two.
Where the theory falls down, however, is not recognising the adverse consequences of creating too much money. The economic history of the world is replete with examples of how this just creates inflation, from Roman emperors to the latest example, Venezuela.
MMT ought to be renamed the Magic Money Tree. The Bank of England is running a competition for whose face should be on the £50 note. For MMT theorists, the answer is obvious: old magic grandad himself, Jeremy Corbyn.
As published in City AM Wednesday 10th April 2019
Image: Jeremy Corbyn by Chris McAndrew via Wikimedia is licensed under CC BY 3.0
Social media influencer, Yovana Mendoza, provided an amusing diversion from Brexit last week.
The 20-something vlogger built a very lucrative personal brand around veganism. She amassed over 3m followers on YouTube and Instagram by advocating a raw vegan diet and 25-day water fasts.
All seemed to be going well until a competitor observed and filmed Mendoza eating seafood. The vlogger’s embarrassment was compounded by the fact that she tried to hide the fish.
Unsurprisingly, the ensuing video went viral.
Mendoza performed what has become the ritual apology on online media: “It was the worst day of my life. I felt like someone had died,” she posted. “Someone did”, was one of the less abusive responses, “the fish”.
The final act in the saga was her own video in which she confessed to eating fish “for health reasons”.
The episode illustrates some fundamental features of the online world. It shows how the popularity of products or ideas need not necessarily be connected to the inherent merits of the offer.
There has always been a strong tendency in popular culture for success to breed success. Things become desirable, not necessarily on account of their inherent qualities, but simply because they are already popular.
The internet compounds these tendencies. The inherent attributes of products become outweighed by the effect of social influence on the choices that people make.
In more conventional markets, where social influence is weak, economic theory has a good understanding of how consumers behave. In this type of market, consumers gather information on the attributes of the alternatives, such as price and quality, choosing products based on their individual preferences and affordability.
In recent decades, the theory has been expanded to incorporate situations in which consumers don’t have all the information to hand.
But it is still essentially based on the idea that people compare what a product offers with what they want.
This differs in the online world, because what people want is altered by observing what other people want.
For example, Mendoza sought to convince her 3m followers that raw veganism and extreme water fasts were part of a healthy lifestyle, despite not following her own advice.
There is no suggestion that Mendoza’s work is fake. But the high emotional content that she regularly published gave it a better chance of being noticed and spread by social influence.
People are learning this fast, and the use of “clickbait” is spreading rapidly.
The largest ever study on fake news was published just over a year ago in the Science journal, and it concluded that fake news and rumours tended to spread much faster and reach more people than accurate stories.
A key reason is that fake news typically shows a much higher level of emotion in their overall content. The question is whether we will all learn to see through this and start behaving rationally again.
But the furore around Brexit suggests that we have some way to go.
As published in City AM Wednesday 3rd April 2019
Image: Clickbait by Pete Unseth via Wikimedia is licensed under CC BY-SA 3.0
Should pure blue sky research be funded?
Certainly, the answer from government-backed research councils seems to be “no”. The emphasis is increasingly on research which has immediate practical applications.
Yet seemingly esoteric research can shed light in quite unexpected areas. For example, a PhD thesis written by a then obscure research student 70 years ago helps us understand the difficulties encountered today in resolving the current Brexit problem with a series of votes.
The number of alternatives suggested as the outcome of the Brexit process has been bewildering.
During the past week alone there has been: Theresa May’s deal; her deal plus a customs union; her deal plus a customs union and the Single Market; a Canada-style free trade agreement; another referendum; revoking Article 50 and cancelling Brexit; and leaving without a deal at all.
Little wonder that MPs have struggled to produce an overall majority in favour of any particular option.
So now we come to the idea of so-called “indicative votes”. MPs are due to vote on each of a large range of options to see which, if any, command a majority.
A variant would be to get MPs – or the electorate as a whole if there were another referendum – to rank explicitly the alternatives in order of preference. When we elect the London mayor, we have to express our preferences rather than just cast one vote, as we do in a General Election.
All of these approaches seem plausible. They share the same basic idea: test the options with a voting system based in some way on preferences among the alternatives, and see which comes out top.
It seems common sense. But unfortunately, as is often the case, common sense is not a very good thing to rely on.
The PhD thesis mentioned above was written by Kenneth Arrow, who went on to win the Nobel Prize in economics. He demonstrated the inherent problems of preference-based voting systems.
Arrow, who died in early 2017 at the age of 95, is virtually unknown to the general public. He spent his life in the sheltered groves of American Ivy League universities. But he made some of the most profound contributions to economic theory in the whole of the second half of the 20th century.
One of these was his so-called Impossibility Theorem. He proved that, whenever voters have three or more alternatives, no system of ranked voting can convert the ranked preferences of individuals into a set of preferences at the aggregate level which is guaranteed to be consistent.
Arrow’s result applies not just to a given practical example, but to all systems of this kind. Paradoxes abound. For example, even if all voters prefer X to Y, it is entirely possible that at the group level the result may not reflect this.
When once asked about the practical implications, Arrow himself said: “Most systems are not going to work badly all of the time. All I proved is that all can work badly at times.”
Brexit is an excellent example not just of this, but of the value of high quality, blue sky research.
As published in City AM Wednesday 27th March 2019
Image: Brexit via Pixabay
HMRC’s programme to make tax digital continues to roll out.
Anyone with a small business will know about the imminent deadline of 1 April, when VAT returns become digital.
Quick to seize an opportunity, several companies have developed software to ease the task.
The digitisation of tax raises the wider issue of whether technology will help the Office for National Statistics (ONS) put together faster and more reliable measures of the state of the economy. The VAT returns potentially give the ONS real-time information.
The current methods of constructing the national accounts – the picture of how the economy is doing – remain rooted in the twentieth century. Ron Jarmin, the deputy director of the US Census Bureau, writes in the latest issue of the top ranked Journal of Economic Perspectives that: “current measurement programs are not keeping pace with the changing economy, and current methods for collecting and disseminating statistical information are not sustainable”.
For example, national accounting bodies such as the ONS and the Bureau of Economic Affairs in America still rely heavily on sample surveys for their information.
Jarmin points out that surveys are encountering increasing problems. Response rates by both households and companies have declined substantially, increasing costs and threatening quality.
The intellectual conservatism of outfits such as the ONS is illustrated by measurements of well-being, or happiness. Hailed as an innovation when David Cameron instructed the ONS to produce this in 2014, it is based purely on old-fashioned survey questionnaires.
Economists in general are traditionally sceptical of survey-based approaches. The respondents, in the jargon of economic theory, simply state their preferences when answering a series of questions.
Economists place much greater weight on preferences which are revealed by the actions which people take. In the 1980s in Britain, survey after survey showed a stated preference for higher taxes and more public spending. Yet in their actions at the ballot box, people kept electing Margaret Thatcher. They revealed a preference for the exact opposite.
The online world is replete with revealed emotions. Indeed, the entirely new language of emojis has evolved to allow people to do this.
Modern machine learning techniques can readily translate the text of tweets and blogs into a scientifically-based measure of wellbeing. And they can do so much faster and more reliably than the survey methods used by the ONS.
Jarmin urges governmental statistical agencies to rely much more on digital information in general. He argues that material “generated from transactions, online interactions, sensors, the internet of things, and many other sources can be used to capture various aspects of economic activity”.
He notes the massive increase recently in the number of economists working for tech companies in the US. Here, innovative methods of data collection and analysis are the norm.
Statistical agencies such as the ONS need to show the same energy and move much more rapidly into the twenty-first century.
As published in City AM Wednesday 20th March 2019
Knife crime continues to dominate the headlines.
What can be done about it? Economics does not pretend to provide all the answers. But, perhaps surprising to some, it has a lot of useful insights to offer on crime.
Gary Becker was a professor of both economics and sociology at Chicago. One day he was pushed for time, and weighed up whether to park in an inconvenient garage, or on the street right next to where he was going, risking a fine.
This sparked his interest more generally into the costs and benefits of crime to the criminal. The result was a paper in the Journal of Political Economy in 1968 which eventually won him the Nobel Prize in 1992.
Becker’s theoretical work has generated a large number of scientific empirical investigations into crime by economists. Would capital punishment, for example, be a sufficient deterrent to reduce the number of knife murders?
If execution reduced the number of murders, it would be morally wrong not to implement it. Sparing the life of the criminal would come at the cost of future innocent victims of other murderers.
Economists have carried out many statistically-based investigations into this topic, mainly using data in the US. From a scientific perspective, it is an excellent source, as there is a lot of natural variability in the data. Some states have capital punishment, others do not, and the number of executions differs a lot across the former.
On balance, although there is some evidence of a deterrent effect, it is not sufficiently strong to be conclusive. This is particularly the case given the rise in recent decades of gang culture.
Young gang members face a non-trivial probability of death in any given year from both other gangs and members of their own. So capital punishment would just be a marginal increase in this probability.
Steve Levitt, also of the University of Chicago, shot to fame in 2005 with the best-selling book Freakonomics which he co-authored. Given that a great deal of crime is committed by relatively unskilled men from single-parent families, Levitt showed that increases in abortion rates reduced the “supply” of such people, and so cut the crime rate.
More pertinently in the current context of knife crime, Levitt describes the evidence on crime and police numbers as being “persuasive”. In urban environments, hiring an extra police officer generates benefits in reduced crime which exceed the cost of employing them.
The “cost” to the criminal is the potential punishment, such as a prison sentence. But this consists of two elements: the expected length of sentence if convicted, and the probability of being caught in the first place. If the latter is low, even much stiffer sentences will have only a small deterrence effect.
The evidence suggests that an increase in the probability of being arrested does reduce crime. Longer sentences can also work, providing that there is sufficient chance of being caught.
The evidence from economics offers little comfort to the Prime Minister in her claim that police numbers play no role in the current spate of knife crimes in the UK.
As published in City AM Wednesday 13th March 2019
The idea that the Earth is flat is a rapidly growing trend on social media. The Flat Earth Society’s Twitter feed has the best part of 100,000 followers.
The fact that the planet is a sphere has been known since at least the time of the ancient Greeks. The astronomer Eratosthenes demonstrated it with a simple but brilliant experiment based on the length of the shadow of the noonday sun at two different places.
The evidence of major natural experiments, which contrast the performances of economies based upon market-oriented principles with those based upon the planned economy ideology of socialism, is decisive in just the same way.
Compare the US and the Soviet Union, East and West Germany, North and South Korea, India and China under different forms of socialism versus under different forms of capitalism. In each example, the capitalist country performed far better than the socialist one.
This is discussed in an interesting new book by Kristian Niemietz, head of political economy at the Institute of Economic Affairs (IEA), entitled “Socialism: the failed idea that never dies”. (As a disclaimer, I am a member of the IEA’s academic panel but was not involved with this book).
The main theme describes the attitudes of western left-wing intellectuals towards socialist societies. The author covers the Soviet Union, China under Mao Zedong, Cuba, North Korea, Cambodia, Albania, East Germany, and Venezuela.
Niemietz identifies common trends in how western believers in socialism have reacted to each of these regimes.
There is an initial honeymoon period, where the experiment generates some evidence that it might be working. The Soviet Union in the 1930s, for example, was industrialising rapidly. Western admirers such as George Bernard Shaw conveniently ignored the mass famines in Ukraine and the millions of people in the labour camps. They eulogised the new type of society.
Eventually, the negative evidence becomes too strong to sweep under the carpet. Supporters then become angry and defensive. They question the motives of their critics and there is a frantic search for excuses.
The third and final stage sees western socialists deny adamantly that this particular example ever constituted real socialism. Socialism did not fail, because the country was never actually socialist to begin with.
These points are not just of abstract interest. Niemietz sets out in detail how the current Labour leaders, Jeremy Corbyn and John McDonnell, have gone through exactly these three phases in their attitudes towards Venezuela.
The final part of the book considers why such an obviously wrong idea continues to attract support.
Niemietz recognises that this is probably a job for psychologists, but being an economist, he looks to see what economic theory can say.
A key point is simple cost benefit analysis. Western intellectuals can acquire prestige and admiration for defending socialism, but never have to incur the costs involved of actually living under that system.
But if Corbyn and McDonnell have their way, the bien pensants of North London would learn for themselves what socialism actually means. Unfortunately, the rest of us would as well.
As published in City AM Wednesday 6th March 2019
Image: Berlin Wall by Flickr is licensed under CC BY-SA 2.0
Sydney University’s Centre for Complex Systems does innovative work on a broad range of topics.
But spending the last couple of weeks there has also given me a wider perspective on some familiar themes.
Climate change is, quite literally, a hot topic in Australian politics. The country melted in 45-degree record temperatures in January, and upcoming federal and state elections are concentrating minds.
Both the main political parties have ambitious targets for emissions reduction. The centre-right coalition government wants to cut emissions by 26 to 28 per cent by 2030. The opposition Labor party, which until very recently was the firm favourite to win the General Election this year, aspires to slash emissions by no less than 45 per cent.
A major report was released last week describing the results of an economic modelling analysis of these plans.
Of course, any such exercise has to be surrounded by many caveats and cautions. But the author, Brian Fisher, has a good pedigree. For many years he headed the Australian Bureau of Resource Economics, and has been involved with the UN’s Intergovernmental Panel on Climate Change.
Under Australian Labor’s plans, for example, Fisher’s report suggests that GDP in 2030 would be nearly 10 per cent lower than it would otherwise be.
A key point is that, in the jargon, the marginal abatement cost curve is non-linear.
Essentially, at the start of any plan to cut emissions there is some low-hanging fruit.
The first steps in reduction can be carried out fairly easily. Cars, for example, have already become far cleaner in recent years without consumers feeling any noticeable pain through higher prices.
But these easy gains soon become exhausted. Further reductions have larger and larger negative consequences for the economy.
With each extra bit of abatement, the costs rise more and more. At some point, they start to explode.
The results come as no surprise to economists. Cutting carbon dioxide emissions is a costly business.
William Nordhaus received the Nobel Prize in economics last year for his work over the past four decades on the economy and climate change. His analysis shows very clearly that targets set by the UN, for example, to control global temperature rises are enormously expensive.
The current climate change strikes by schoolchildren in the UK are a direct copy of those which happened last November in Australia.
These children are owed a fair and detailed conversation about the costs of the policies which they are calling for and how that would impact their lives, from making their smartphones and other gadgets more expensive, to putting up the costs of any holiday plans they might have.
Many liberals seemed to encourage the strikes. They appear to hold the opinion that good intentions are all that count. The Duchess of Sussex, for example, feels able to both campaign on climate change and take a private jet from New York back to the UK.
But if serious action is going to be taken on the climate, both politicians and scientists have to be more explicit about the costs. A proper, mature dialogue with the electorate is needed.
As published in City AM Wednesday 27th February 2019
The political spotlight remains focused on Brexit, but an important dogfight is developing in the area of higher education.
The specific issue is whether universities in the UK should be allowed to go bankrupt.
It is not merely a theoretical question. In the past year, a number of universities have announced deficits running well into the millions, and are having to cut budgets and staff.
Chris Skidmore, the higher education minister, has warned that some institutions “may exit the market altogether as a result of strong competition”.
However, Angela Rayner, Labour’s shadow education secretary, explicitly ruled this out in a speech last weekend. Universities, she declared “are not profit-making private companies that can simply be left at the mercy of market forces”.
The source of the dispute is a reform introduced in 2015. Whereas each university used to face limits on the number of students it could recruit, the changes essentially enabled an institution to take on as many students as it wants.
Strict rationing was endemic in the previous system. The number of students with the A-level grades to qualify them for admission to good universities exceeded the number of places on offer.
Many universities have expanded their capacity in the last few years, especially in humanities courses which are cheaper to provide than science and engineering.
The overall effect has been a flight to quality. Students obviously want to go to a more prestigious university if they can. And since all universities charge the same level of fees, given the chance that’s exactly what students have done.
The impact on weaker universities has been pretty dramatic. Their intakes have fallen sharply.
From the students’ perspectives, the reforms have been unequivocally advantageous. Many more get to go to more prestigious institutions than they would have done when rationing was in force.
But weak universities have had to close departments and cut staff. There are persistent rumours that several face bankruptcy because their student numbers – and hence their income – have dropped so far.
Rayner’s speech tells us a great deal about the mindset of the current Labour leadership on this issue. Far from being the party of the workers, Labour under Jeremy Corbyn has become an unashamed ramp for the public sector middle class. Its instincts are to defend the lecturers teaching second-rate courses that no one actually wants to take.
The preferences of consumers in this market – where the students really want to go – are very clear. Yet Labour wants to override these and pander to the interests of the producers – the staff.
Regardless of the shape which Brexit takes, or even if by some machination it does not happen, the willingness and ability to innovate will be the key factor in determining the UK’s future prosperity.
America, China and the rest of Asia will press ahead working out how to create better products and services. Labour’s instincts, in education and elsewhere, are to prevent changes from happening if they threaten its core support. While the rest of the world moves forward, Labour wants Britain to stand still.
As published in City AM Wednesday 20th February 2019